Stock Options

Common situations where stock options are required to be valued include the following:

  • Upon grant, exchange, or termination – Article and News research
  • Proxy statement disclosure – Company and Industry Research
  • Financial statement purposes (SFAS 123R) and footnote disclosure – Company and Industry Research
  • Executive compensation or income tax reporting (IRC Section 409A) – Industry Research
  • Ownership transfer – Company, Industry, Market Research
  • Breach-of-contract matters – Industry Research

Option Valuation Models

Economic Models

Econometric models, also referred to as empirical models, were developed by studying historical relationships of various economic factors thought to influence the value of options and the actual market price of options. The most common econometric models are the Shelton and Kassouf models.

Theoretical Models

Theoretical models, also referred to as statistical or probability models, are forward-looking and consider the option terms and characteristics of the underlying stock to determine what the options should sell for in the market. The most common theoretical models are the Black-Scholes, Noreen-Wolfson, and lattice models.

More on Valuation Models

Black-Scholes Option Pricing Theory

In 1973, Fischer Black and Myron Scholes published the first successful model for pricing financial options.

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Shelton, Kassouf, and Noreen-Wolfson Models

In 1989, Shannon Pratt conducted tests of the Shelton, Kassouf, and Noreen-Wolfson models.

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Lattice Model

A lattice model is a system that calculates fair value of a share option (or similar instrument) using assumptions to estimate share value and post-vesting exercise behavior of option holders during the term of an option.

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